The Boohoo (LSE: BOO) share price has faced almost consistent selling pressure for almost the past 18 months, despite an uptick last week. It seems to have become the stock investors love to hate. Even though the company has continued to report rapid sales growth and expansion across its key markets, the market has largely continued to avoid the enterprise.
However, when I look past the company’s recent share price performance and focus on its underlying fundamentals, I see a corporation that is firing on all cylinders. It has a cash-rich balance sheet, devoted customer base, and the infrastructure required to capitalise on the booming e-commerce market.
With these qualities in place, I think the company has fantastic growth potential over the next 10 years.
Boohoo share price headwinds
Whenever I come across a company that has seen a substantial fall in its market value, I first try to understand why investors have been selling the enterprise.
When it comes to Boohoo, I do not think there is one definitive answer to explain why the market has turned its back on the firm over the past 18 months.
Instead, I think there are several factors that explain its recent performance.
These include the organisation’s supply chain issues, corporate governance concerns, and the stock’s valuation.
The company’s reputation took a significant hit when it was revealed that some of its suppliers were not paying their staff the minimum wage.
Reputational issues
To its credit, Boohoo acted as fast as it could to improve the conditions in its supply chain. It has terminated contracts with a large number of suppliers that do not meet its standards. It has also invested a significant amount of money in improving the quality of its supply chain and is opening its own manufacturing facilities.
Unfortunately, it takes years to build a reputation and seconds to ruin it. It could take years for the company to rebuild its reputation in the City after this significant setback. Investors may continue to avoid the business until there is complete clarity about the state of its supply chain and the treatment of its workers.
In addition, the Boohoo share price has hardly been cheap in the past.
Shares in the company are currently selling at a forward price-to-earnings (P/E) multiple of 13, which seems appropriate for an enterprise that is expected to report a 31% decline in earnings this year due to supply chain issues and increasing costs.
However, over the past five years, the stock has traded at an average forward P/E of around 50. This valuation did not leave much room for disappointment.
The valuation of the Boohoo share price
A highly valued company needs to meet City expectations for growth. If it fails to meet those expectations, the market’s punishment can be swift and severe. It looks to me as if the market has not wasted any time re-rating the Boohoo share price to a lower multiple.
Those are the reasons why I think the stock has performed so poorly over the past 18 months.
But while these challenges are likely to continue, the company also has plenty of opportunities on the horizon.
Most importantly, the global e-commerce market is still expanding. Boohoo has the scale and infrastructure needed to capitalise on this market growth. Based on my personal knowledge, compared to most other brands, the company’s online customer experience is vastly superior. Some competitors are miles behind. The fact that the group’s sales have grown at a compound annual rate of 55% over the past six years is testament to its customer offering.
As well as its superior customer offering, the company also has a cash-rich balance sheet. At the end of 2021, it had no debt and a net cash balance of £258m.
Competitive advantage
This gives the group a significant competitive advantage over some of its peers. It has money to pursue growth initiatives without having to rely on third parties to provide financing. It can also invest in new growth initiatives without having to worry about overstretching its balance sheet, which many peers cannot do.
The financial flexibility also means the enterprise can take advantage of opportunities when they present themselves in the market. For example, over the past couple of years, it has acquired a number of smaller firms, which have collapsed under the weight of their own obligations. Boohoo has been able to step in and flex its financial muscles.
I think we will likely see more retail failures over the next 24 months as higher prices and competitive forces wreak havoc across the sector. Boohoo looks to be incredibly well-positioned to take advantage of this environment.
Undervalued opportunity
Considering all of the above, I think the Boohoo share price does look attractive at current levels. I think the market has been far too aggressive selling the stock in recent weeks. The shares now look cheap compared to the company’s potential.
Even though City analysts are forecasting a 31% decline in earnings per share for its current financial year, they are expecting a small recovery in fiscal 2023.
Based on these estimates, the stock is trading at a 2023 P/E multiple of 11.5. That is below the retail sector average and does not take into account the corporation’s robust balance sheet. When I factor in the company’s cash position, its valuation falls even further.
As such, I think the Boohoo share price is undervalued compared to its potential. The company has had to deal with some significant challenges over the past couple of years. And it seems likely challenges such as rising costs and competition will remain an issue for the enterprise going forward. However, considering the stock’s valuation and competitive advantages, I believe the business is undervalued today. I would buy it for my portfolio.
